Despite stronger rand, SA growth levels remain low

Tsitsi Hatendi-Matika, Head: Retail Investment Specialist at Absa’s Wealth and Investment unit.

South Africa will only achieve the growth levels it needs when all structural elements are in place, writes Tsitsi Hatendi-Matika, Head: Retail Investment Specialist at Absa’s Wealth and Investment unit.

While “Ramaphoria” put the nation on a brief high, sentiment can only go so far. This week, manufacturing production for February came out at 0.6% year-on-year, a slow-down from 2.4% in January, breaking five months of strong growth. Mining production positively surprised, increasing by 3.1% year-on-year, and when seasonally adjusted compared to January, was 0.9%. Some believe the next phase will be “Ramaphobia” but for those who are less skeptical, not only is it a time for renewal, deep introspection but also a time to find ways to turn up the dial in a significant manner.

The World Bank recently upgraded its South African economic growth forecast from 1.1% to 1.4%, on the back of improved consumer confidence. The caveat to its statement was that, without significant structural changes, South African growth will struggle to surpass the 2% level. There are many theoretical suggestions when it comes to generating higher gross domestic product (GDP) levels, but it is important to select some of the low hanging fruit.

Education has been topical over the last few years, particularly with the debate around free tertiary education. In addition to the R10 billion provisional allocation made in the 2017 budget, National Treasury earmarked R57 billion for tertiary education over the medium-term, making this the largest growing line item in the national budget, next to debt servicing costs. As the new Cabinet continues to work through structural issues, the foundations of the school system will need to be re-assessed and reconstructed in order to see significantly different outcomes.

Several studies suggest that economic growth is driven by entrepreneurial mindset and activity. Small and Medium Enterprises (SMEs) have been identified as a key source of inclusive growth for developing countries. National Treasury estimates that SMEs employ 47% of the workforce in South Africa, contribute more than 20% of GDP and pay 6% of corporate taxes. With more support, SMEs will allow for greater diversification of an economy and better development of new and unsaturated sectors of the country. SMEs will benefit in the digital age as they are more nimble, have more flexible resources and have been built to be more agile when compared to large organisations with more rigid infrastructure. There are multiple government initiatives available to support SMEs. The following are a few examples:

• The CEO initiative has a R1.4 billion fund to support SMEs
• Government’s small business and innovation fund which seeks to fund start-up businesses have allocated R1 billion focused on entrepreneurs
• The venture capital incentive promotes venture capital firms investing in small businesses and of the R2.5 billion in the incentive scheme, R615 million has been allocated to SMEs
• The small enterprise development fund has R2.1 billion over the medium term which the Department of science and technology and National Treasury will manage in collaboration.

Corporate governance, consistency of policies, effective government, and reduction of corruption are other key avenues which will prove to be imperative to stimulation of growth in the new phase the country finds itself in.

We cannot be naïve enough to forget that South Africa is an open economy and is subject to volatility in global markets. Protectionist actions by large global players, particularly the United States will directly impact the growth locally.

No matter what “Rama” phrase one chooses to use, there is work to be done, and expectations remain high.